On 29 March, Brazil’s largest political party – the Democratic Movement Party (PMDB), which controls 68 of the 513 seats in the Chamber of Deputies and 18 of the 81 Senate seats – announced its withdrawal from the governing coalition of President Dilma Rousseff. The much-anticipated decision followed weeks of intense political upheaval against a backdrop of economic recession (GDP contracted by 3.8% in 2015 and is set to shrink by 3.5% this year), an ever-expanding corruption scandal involving state-owned oil company Petrobras, and a disputed impeachment process underway against the President for alleged violation of fiscal laws by using state bank funds to cover budget shortfalls. With regard to the latter, Rousseff’s chances of survival were considered relatively favourable until earlier in March, when her mentor and predecessor Lula da Silva was interrogated about his role in the Petrobras scandal and later accused of concealing ownership of real estate assets. The news dented the former President’s popularity and, by association, further depressed Rousseff’s already dismal approval rating. On 13 March, demonstrations in cities across Brazil to demand the departure of the President attracted well over three million people (significantly more than the anti-government protests of one year ago, then labelled as the largest in a generation). Only a few days later, Rousseff showed defiance by trying to appoint Lula da Silva as her chief of staff: a controversial move that critics say was inspired solely by the fact that Lula da Silva’s serving in government will shield him from being prosecuted (unless the Supreme Court gets involved).

Impact on country risk

The PMDB was the most important coalition partner of Dilma Rousseff's Workers' Party (PT), so its exit from government ranks may have important consequences. Crucially, without the PMDB’s backing, Rousseff will struggle to garner the support of one in three members of congress that will eventually be necessary to avert an impeachment. Quite understandably, the PMDB right now does not want to be associated with the very unpopular PT. Yet the PMDB has other strategic considerations in mind, too. Notably, should Rousseff be impeached, a PMDB member – Vice-President Michel Temer – would be the first in line to take over her duties until the next election in 2018. To further complicate matters, however, Temer's fate is somehow intertwined with that of Rousseff. That is because a separate process at the Brazilian Supreme Electoral Court will determine whether or not the result of the 2014 presidential election needs to be annulled over allegations that the winning coalition illegally financed its campaign. Were that to happen, then new elections will follow. In any case, it is clear that politics will continue to be dysfunctional for some time to come. As such, Brazil will likely remain deprived of the effective policy-making it so desperately needs to address its economic woes. Analyst: Sebastian Vanderlinden, s.vanderlinden@credendogroup.com